Do I stay her friend or never talk to her again...?

[Lily]

That is a horrible and nasty thing to do. She shouldn't of said about your friend Tara, it had nothing to do with her so maybe possibly try to tell her that but not in a horrible rude way? Just be honest and say "Sarah, you've been hurting us all lately and you've changed. You have been my best friend for years now but you grassing on Tara wasn't nice. We hate looking bad at dancing so could you decide what you're gonna do? Keep dancing or just quit?"

I personally think you should stay friends with Sarah because you've known each other forever. See how things go, if they get worse then maybe distance yourself from her but still keep her as a friend.